Thursday, August 25, 2016

If
you are approached by an unsolicited offer to buy your company, you might think
this a good thing. If not handled properly, it could be a real drain on your
company's performance. We are often contacted by a business owner after he has
been approached by a buyer. He wants information from us on the merger and
acquisition process, which we are happy to provide. He wants to wait, however,
to engage our firm to sell his company"until this situation with the buyer plays itself out."

The Single Buyer's Game Plan

This
is the start of the death spiral. I don't want to sound overly dramatic, but
this rarely has a happy ending. These supposed buyers will drain your time,
resources, focus on running your business and, your company's performance. They
want to buy your business as the only bidder and get a big discount. They will
kick your tires, kick your tires, and kick your tires some more.

I
recently read a great article from a UK Business Advisor, Clinton Lee, that takes
a little different but equally cautionary view of this Tire Kicker.

If
they finally get to an offer after months of this resource drain,it is woefully short of expectations, to the
surprise or chagrin of the owner.A
second potential outcome is that when the offer does come, the owner doesn't
know if it is a good or bad offer. Finally, once the buyer has tied up the owner
with the LOI, he then proceeds to attack transaction value through every step
of due diligence. He is the only suitor so there is nothing to stop bad
behavior.

This
is so costly to the business owner. Many owners repeat this process several
times before they acknowledge the damage being done to their business. When
they do eventually hire a merger and acquisition firm or a business broker, the
company value has eroded substantially.

Even
though we have watched this situation unfold from a distance many times, we
have been frustrated by our lack of success in changing the owner's incurable
optimism about this buyer.Being the
deal guys that we are, we needed to come up with a creative solution and a deal
structure to move the business owner toward a better outcome. If we feel so
strongly that this buyer will not be the actual buyer in the end, we should be
willing to "carve out" that buyer in the form of a discounted success
fee.

Put the Buyer into a Competitive Bid Situation

By
George, that's it! If an owner has an identified buyer, we can incorporate a
sliding scale discount on the success fee over time if this identified buyer
becomes the actual buyer. If he becomes the actual buyer very quickly the
discount is big. If the deal closes after five months of our M&A work, the
discount has slid to zero because we have thrown him into the mix with several
other qualified buyers and his offer will have been leveraged higher by 25% or
more.

The
benefits to the business owner with this approach are meaningful. First, if
this is that rare occurrence of a legitimate buyer with a legitimate offer, the
owner will not pay a big success fee for a small amount of work. Secondly, the
owner can turn the burden of the process over to the M&A firm, freeing him
up to successfully run his business during the process. Next, we end the
endless, resource draining, tire kicking that erodes business value. Finally,
by changing this from an auction of one to a truly competitive bidding
situation involving the universe of qualified buyers, the owner will have no
doubt that he got the best the market had to offer for his business.

Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of lower middle market companies. For more information about exit planning and selling a business, click to subscribe to our free newsletter The Exit Strategist

Friday, August 12, 2016

Do
you know the value of your business? When I asked this question to
business owners in attendance at a presentation I recently delivered, I
was not surprised the majority weren’t 100 percent sure. Why should they
care about value? No one ever asks for it. Banks, shareholders and
government agencies never ask private business owners what their company
is worth.

In
reality, though, there are a lot of different stakeholders valuing your
business every day, such as your employees, other banks, investors and
customers. I would venture to guess that that alone should be a good
enough reason to care about value.

What Buyers Look for in a Business

I
recently found myself watching NBC’s "Shark Tank," where aspiring
entrepreneurs pitch their business concepts and products to a panel of
business moguls who have the cash and the know-how to make it happen.
Hands down, the fastest way to get thrown out of the tank is to have an
unrealistic valuation of your business.

So,
think about it this way: If you had your eye on an acquisition, what
would you look for? Putting yourself in a buyer's shoes is a great
exercise to tempervaluationexpectations.
I bet you would be looking for things like a diversified customer base,
a systematic way of generating recurring revenue,barriers to entryfrom competitors and high margins, to name a few. So, be honest: Does your company have these characteristics?

Great Companies Drive Value

If
building a company was a sport, the value of the company would be how
we keep score. Jim Collins, author of "Good to Great," identified elite
companies that have made the leap from good to great. Companies that
make the leap were defined as meeting the following criteria:

15-year cumulative stock returns at or below the general stock market

Followed by a transition point

Then cumulative returns of at least three times the market value over the next 15 years

What this suggests is that measuring corporate value is a key tool in tracking a company’s transition from good to great.

The Benefits of Regularly Updated Business Valuations

For
me, the same question always come to mind: Why haven’t valuations
become more commonly adopted as a strategic planning tool for private
businesses? Every year, companies engage accounting firms to audit,
review or compile their books. This requirement is driven by banks, tax
authorities and others that require financial statements verified by an
independent third party. I truly believe that an annual valuation would
provide most business owners with more insight into their company than
audited financial statements.

As I see it, the benefits of using periodic business valuations as a strategic planning tool are:

Business
valuation provides business owners with a quantitative measure of the
corporate value created through the execution of a strategic plan.

Frequent
business valuations will give owners a better understanding of which
financial levers they can pull to drive the value of their business.

Like in "Shark Tank," knowing the value of the business gives owners increased credibility with potential investors and lenders.

A Better Valuation Tool

Here are my thoughts on a better valuation model compared to traditional valuations currently offered by most advisors:

Traditional Valuation:

Based primarily on financial information;

Only provides a value of the business at one point in time;

Limited recommendations on how to increase value; and

Engagement is over once a value is determined.

A Better Valuation Model:

Digs deeper into key market and operational value drivers of the business;

Current valuation sets a benchmark and provides a comparison to where you want to be;

Provides a clear understanding of strengths and weaknesses in the business, plus recommendations on how to improve; and

Determining
the value of the business is just the beginning. The engagement
provides constant monitoring and measurement of value to help business
owners achieve wealth creation goals.

So,
my question to you, private business owner, is a crucial one: How can
you know if you are moving toward greatness if you don’t know or
frequently measure the worth of your business?

Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of lower middle market companies. For more information about exit planning and selling a business, click to subscribe to our free newsletter The Exit Strategist

For Business Owners Seeking Strategic Value in Their Company Sale

Have you ever marveled at the prices at which some companies sell while most others sell at predictable valuation metrics. Much of this value creation secret is the result of "STRATEGIC ASSETS". These are assets that do not appear on a company balance sheet, yet they are hugely valuable to strategic industry buyers. This checklist will help you identify, nurture, and develop key drivers of transaction value for your eventual business sale.